Business- Level
Strategy and the
Industry Environment
6-1
Level of Strategies
Industrial
Environment
Corporate
level
Business Level
Functional Level
6-2
The Industry Environment
There is the need to continually formulate and implement businesslevel strategies to sustain competitive advantage over time in
different industry environments.
•
•
Different industry environments present
different opportunities and threats.
A company’s business model and
strategies have to change to meet the
environment.
6-3
The Industry
Environment
• Companies must face the challenges of
developing and maintaining a competitive
strategy in:
– Fragmented Industries
– Embryonic Industries
– Growth Industries
– Mature Industries
– Declining Industries
6-4
Fragmented Industries
A fragmented industry is one composed of a large
number of small and medium-sized companies.
• Low barriers to entry due to lack of economies of scale
• Low entry barriers permit constant entry by new companies
• Specialized customer needs require small job lots of products - no
room for a mass-production
• Diseconomies of scale
6-5
Fragmented Industries
Chaining
IT and
Internet
Fragmented
Industries
Franchising
Horizontal
Merger
6-6
Competitive Features
of a Fragmented Industry
•
Absence of market leaders with large market shares or widespread
buyer recognition
•
Product/service is delivered to neighborhood locations to be
convenient to local residents
Buyer demand is so diverse that many firms are required to satisfy
buyer needs
Low entry barriers
•
•
•
•
•
•
Absence of scale economies
Market for industry’s product/service may be globalizing, thus putting
many companies across the world in same market arena
Exploding technologies force firms to specialize just to keep up in
their area of expertise
Industry is young and crowded with aspiring contenders, with no firm
having yet developed recognition to command a large market share
6-7
Embryonic Industries
An embryonic industry is one that is just
beginning to develop when technological
innovation creates new market or product
opportunities.
6-8
Growth Industries
A growth industry is one in which first-time
demand is expanding rapidly as many new
customers enter the market.
Companies must understand
the factors that affect a
market’s growth rate – in order
to tailor the business model to
the changing industry
environment.
6-9
Market Characteristics: Growth
Industries
• Mass markets typically start to
develop when:
– Technological progress makes a
product easier to use and increases
its value to the average customer.
– Key complementary products are
developed that do the same.
– Companies find ways to reduce
production costs allowing them to
lower prices.
6-10
Market Characteristics: Embryonic
Industries
• Reasons for slow
growth in market
demand
– Limited performance and poor
quality of the first products
– Customer unfamiliarity with what
the new product can do for them
– Poorly developed distribution
channels
– Lack of complementary products
– High production costs
6-11
Market Development
and Customer Groups
Both innovators and early adopters enter the market
while the industry is in its embryonic state.
6-12
Market Share of Different
Customer Segments
Most market demand and industry profits arise during the
early and late majority customer segments.
6-13
Strategic Implications:
Crossing the Chasm
•
To cross the chasm between the early adopters and the early
majority, companies must:
– Identify the needs early majority users.
– Alter the business model.
– Alter the value chain and distribution
channels to reach the early majority.
– Design the product to meet the needs of the
early majority
– Anticipate the moves of competitors.
6-14
Strategic Implications of Market
Growth Rates
•
•
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Different markets develop at different rates.
Growth rate measures the rate at which the industry’s
product spreads in the marketplace.
Growth rates for new kinds of products seem to have
accelerated over time:
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–
Use of mass media
Low-cost mass production
6-15
Strategic Implications of Market
Growth Rates
• Factors affecting market growth rates:
– Relative advantage
– Complexity
– Compatibility
– Observability
– Availability of complementary products
– Trialability
6-16
Differences in Diffusion Rates
Different markets develop at different growth rates
6-17
Navigating Through the
Life Cycle to Maturity
Two crucial factors:
1.
2.
Competitive advantage of company’s business model
Stage of the industry life cycle
•
•
Embryonic stages – share building strategies
Growth stages – maintain relative competitive
position
•
Shakeout stage – increase share during fierce
competition
•
Maturity stage – hold-and-maintain to defend
business model
6-18
Mature Industries
A mature industry is dominated by a small number of large companies
whose actions are so highly interdependent that success of one company’s
strategy depends on the response of its rivals.
Evolution of mature industries
– Industry becomes consolidated.
– Business level strategy is based on how established
companies collectively try to reduce strength of
competition.
– Interdependent companies try to protect industry
profitability.
6-19
Mature Industries
Strategies
– Deter entry into industry
 Product proliferation
 Maintaining excess capacity
 Price cutting
– Manage industry rivalry
 Price signaling
 Capacity control
 Price leadership
 Nonprice competition
6-20
Strategies for
Deterring Entry of Rivals
Filling the Niches:
making it difficult for new
competitors to break into a new
industry & establish a
beachhead
Sending a Signal:
Warning of Retaliation:
to potential new entrants
contemplating entry that new
entry will be met with price cuts
by increasing output and
forcing down prices until
market entry would be
unprofitable to entrants
6-21
Product Proliferation in
the Restaurant Industry
Where the product
spaces have been
filled, it is difficult for
a new company to
gain a foothold in the
market and
differentiate itself.
6-22
Strategies for Managing
Industry Rivalry
Convey intentions
Informal pricing
(e.g. Tit-for-Tat) regarding
pricing to other
companies to allow the
industry to choose the
most favorable pricing
options. Intent is to
improve industry
profitability.
when one company
takes the responsibility
for choosing the most
favorable industry
pricing option. Formal
price setting jointly by
companies is illegal.
Differentiation
by offering products with
different features or
applying different
marketing techniques:
• Market development
• Market penetration
• Product development
• Product proliferation
Market Signaling
to secure coordination
with rivals as a capacity
control strategy and to
reduce industry
investment risks.
Collusion on timing of
new investments is
illegal.
6-23
Four Nonprice
Competitive Strategies
6-24
Toyota’s Product Lineup
Toyota has used market development to become a broad differentiator and
has developed a vehicle for almost every main segment of the car market.
6-25
Game Theory
Companies in an industry can be viewed as players that
are all simultaneously making choices about which
business models and strategies to pursue in order to
maximize their profitability.
6-26
Game Theory
•
Basic principles that underlie game theory:
– Look Forward and Reason Back – Decision
Trees
– Know Thy Rival – how is the rival likely to act
– Find the Dominant Strategy – Payoff Matrix
– Strategy Shapes the Payoff Structure of the
Game
6-27
A Decision Tree for UPS’s Pricing
Strategy
6-28
A Payoff Matrix for a Cash-Rebate Program for
GM and Ford
6-29
Altered Payoff Matrix
for GM and Ford
6-30
Declining Industries
A declining industry is one in which market demand has leveled
off or is falling and the size of total market starts to shrink.
Competition tends to intensify and industry profits tend to fall.
•
Reasons for and severity of the decline
– Reasons: technological change, social trends, demographic
shifts
– Intensity of competition is greater when:
 The decline is rapid versus slow and gradual.
 The industry has high fixed costs.
 The exit barriers are high.
 The product is perceived as a commodity.
• Not all industry segments typically decline at the same rate
 Creating pockets of demand
6-31
Declining Industries
Leadership
Harvest
Declining
Industries
Niche
Divestment
6-32
Factors for Intensity of Competition in Declining
Industries
6-33
Strategy Selection
in a Declining Industry
Choice of strategy is
determined by:
• Severity of the
industry decline
• Company strength
relative to the
remaining pockets
of demand
6-34
Summary
Fragmented
Embryonic
Growth
Mature
Declining
Corporate
level
Business Level
Cost Leadership
Differentiation
Focus
Functional Level
6-35